[Senate Hearing 112-784]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-784
 
                   BOOSTING OPPORTUNITIES AND GROWTH 
                    THROUGH TAX REFORM: HELPING MORE
                YOUNG PEOPLE ACHIEVE THE AMERICAN DREAM

=======================================================================


                                HEARING

                               before the

                          COMMITTEE ON FINANCE

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 10, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance




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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENT

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1

                               WITNESSES

Newman, Dr. Katherine S., James B. Knapp dean of the Zanvyl 
  Krieger School of Arts and Sciences, The Johns Hopkins 
  University, Baltimore, MD......................................     3
Corak, Dr. Miles, professor, Graduate School of Public and 
  International Affairs, University of Ottawa, Ottawa, Ontario, 
  Canada.........................................................     6
Lefgren, Dr. Lars J., associate professor, Department of 
  Economics, Brigham Young University, Salt Lake City, UT........     9
Currier, Erin, project manager, Economic Mobility Project, The 
  Pew Charitable Trusts, Washington, DC..........................    11
Steuerle, Dr. C. Eugene, institute fellow and Richard B. Fisher 
  chair, The Urban Institute, Washington, DC.....................    12

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    27
Corak, Dr. Miles:
    Testimony....................................................     6
    Prepared statement...........................................    29
    Responses to questions from committee members................    42
Currier, Erin:
    Testimony....................................................    11
    Prepared statement with attachment...........................    60
    Responses to questions from committee members................   105
Hatch, Hon. Orrin G.:
    Prepared statement...........................................   113
Lefgren, Dr. Lars J.:
    Testimony....................................................     9
    Prepared statement...........................................   115
    Responses to questions from committee members................   121
Newman, Dr. Katherine S.:
    Testimony....................................................     3
    Prepared statement...........................................   128
Steuerle, Dr. C. Eugene:
    Testimony....................................................    12
    Prepared statement...........................................   139
    Responses to questions from committee members................   147

                             Communications

Center for Fiscal Equity.........................................   159
Nellen, Annette..................................................   162


                       BOOSTING OPPORTUNITIES AND


                       GROWTH THROUGH TAX REFORM:


                       HELPING MORE YOUNG PEOPLE

                       ACHIEVE THE AMERICAN DREAM

                              ----------                              


                         TUESDAY, JULY 10, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 2:50 p.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Max Baucus 
(chairman of the committee) presiding.
    Present: Senators Wyden, Hatch, and Thune.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Lily Batchelder, Chief Tax Counsel; and Tiffany 
Smith, Tax Counsel. Republican Staff: Jim Lyons, Tax Counsel; 
and Jeff Wrase, Chief Economist.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    I first apologize to the witnesses and others in attendance 
for the delay. We had a somewhat unscheduled Senate vote, and I 
think we have now concluded the vote, and hopefully members of 
the committee will begin to file in.
    President Truman once said, ``All of us want our children 
to have a better life than we had, and it should be the 
constant aim of each generation to make things better for the 
next.''
    As a father, I know how concerned parents can be about 
their children's future. Americans just want their children to 
have a fair shot at earning a good living and succeeding in 
life. But more and more, American parents worry whether this 
dream could come true. These worries are well-founded, 
especially for parents who have not been able to climb the 
economic ladder as high as they would like.
    I used to say--and I believed it strongly--that America was 
a land of greatest opportunity. There was more mobility, more 
opportunity in America than in any other country in the world. 
No more.
    In the United States, a child born to a family in the top 
10 percent of earners is 23 times more likely to end up 
financially well-off than a child born in the bottom 10 
percent.
    This does not mean that a child from a low-income family 
will never make it, but it implies that they face strong 
headwinds, where a child from a more fortunate background 
benefits from a strong wind behind their back.
    The American children from lower-income families face 
stronger headwinds than low-income children in other countries. 
In a study of the U.S. and nine of our competitors, the United 
States comes in dead last in mobility. A Danish child born in 
the bottom 20 percent of earners is almost twice as likely to 
make it to the top 20 percent as an American low-income child.
    This lack of mobility means we are not capitalizing on all 
of our citizens' talents and we are betraying the ideals on 
which our country was founded. Many of our foreign competitors 
are doing a better job advancing the American dream and 
opportunity than we are.
    So what determines opportunity? What can we do to ensure 
that all American children have a fair shot at the American 
dream? To find opportunity, children need a high-quality 
education. They need skills to be successful.
    But an American child from the top income quarter is 10 
times as likely to go to college as a child from the bottom 
quarter. In 1979, the United States led the world in the number 
of people who graduated from college. That was back in 1979. We 
are now number 16 out of 34 countries, just above Estonia, 
Poland, and Chile. We used to be a leader. We have slipped to 
16th.
    To succeed, children also need to be healthy and cared for. 
They need mothers who are healthy during pregnancy. Lower birth 
weights result in children having lower lifetime earnings. They 
need parents who have the ability to provide for them. If their 
parents work, they need high-quality child care.
    Congress has tried to improve opportunities for families 
and children through the tax code. There are numerous tax 
incentives to encourage work, education, health care, and 
savings. The Earned Income Tax Credit and the Child Tax Credit 
give low-income parents an incentive to work and help them 
provide for their children.
    In 2010, the Earned Income Tax Credit lifted 3 million 
children out of poverty, and health reform will give more 
pregnant women access to quality health care. But many 
incentives in the tax system are upside-down. They give the 
most help to those who need it the least. Provisions like the 
exclusion for employer-provided child care provide more support 
for children with parents in high-income brackets than those 
with lower incomes.
    For example, the most tax savings a family making $40,000 a 
year can receive from the exclusion is $750, but a family 
making $250,000 can receive twice this amount. For children in 
low-income families, this break may provide no benefit at all.
    Today's hearing will focus on economic mobility and how we 
can use the tax code to strengthen the American dream. It is an 
important issue, very important. It is such an important issue 
that is very much on people's minds. The Washington Post and 
USA Today have stories today on the very study that one of our 
witnesses will discuss. The tax system clearly is not the only 
way to improve opportunities, but it is an important way. We 
should use all the tools that we have.
    So, as we work to simplify the tax code, let us ensure that 
every child has a fair shot at a richer and fuller life, and, 
in the words of President Truman, let us help this generation 
make things better for the next.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. I do not see Senator Hatch here yet, but when 
he arrives we certainly would like to hear from him.
    But I would now like to introduce our witnesses. First is 
Dr. Katherine Newman. Dr. Newman is the James B. Knapp dean of 
the Krieger School of Arts and Sciences at Johns Hopkins 
University. Next is Dr. Miles Corak, professor at the Graduate 
School of Public and International Affairs at the University of 
Ottawa. Our third witness is Dr. Lars Lefgren. He is associate 
professor at the Department of Economics at Brigham Young 
University. Our fourth witness is Erin Currier. She is the 
project manager of the Economic Mobility Project at The Pew 
Charitable Trusts. Finally, we have Dr. Eugene Steuerle. Dr. 
Steuerle is an institute fellow and Richard B. Fisher chair at 
the Urban Institute.
    Thank you all for coming. All of you know the drill: your 
statements will be automatically included in the record, and I 
ask each of you to summarize in about 5 minutes.
    Dr. Newman?

 STATEMENT OF DR. KATHERINE S. NEWMAN, JAMES B. KNAPP DEAN OF 
   THE ZANVYL KRIEGER SCHOOL OF ARTS AND SCIENCES, THE JOHNS 
               HOPKINS UNIVERSITY, BALTIMORE, MD

    Dr. Newman. Great. Thank you, Mr. Chairman.
    The Chairman. And, as I always say to our witnesses, let 
her rip. Just say what is on your mind, right?
    Dr. Newman. I am about to do that.
    The Chairman. Good. That is what we ask.
    Dr. Newman. I am very pleased to have this chance to 
contribute to your deliberations on the ways in which the tax 
code might facilitate upward mobility, and to do that I draw on 
a couple of decades' worth of research, especially in Harlem, 
on the Nation's working poor, as well as a wealth of data that 
has been contributed by other scholars, especially economists, 
who have studied the pathways of other countries whose mobility 
rates, as you pointed out, exceed our own.
    My aim here is to try to contribute some thoughts on what 
kinds of investments might promote mobility and how difficult 
it is for working people below the poverty line to make those 
investments. I will conclude with some thoughts about the tax 
code, on which you have asked us to deliberate.
    As you said, it is by now axiomatic that upward mobility 
depends on educational attainment. Even in the current economic 
downturn, unemployment is far lower among college graduates 
than high school graduates, and drop-outs are vastly over-
represented among the Nation's poor.
    The wage premium to higher education is substantial, and of 
course, accordingly then, ensuring that children of the working 
poor complete high school and attend college or seek some kind 
of advanced training is probably the best recipe for upward 
mobility.
    But staying on that track is very sensitive to the quality 
of early childhood education. Low-wage jobs leave families with 
very few resources to invest in the next generation, and hence, 
among the families that I studied in Harlem, child care options 
were meager in supply, erratic, and poor in quality.
    In the 14 years that I followed working and near-poor 
families in Harlem and the outer boroughs of New York City, my 
observations of their child care arrangements nearly always 
left me concerned about the fate of the next generation.
    The most common source of child care for the working poor 
was a relative or a neighbor, often with four or five other 
children to take care of. The best of these settings would see 
young children scribbling in coloring books once in a while, 
but very often they were left to entertain themselves while 
grown-ups in the room watched television or ignored their 
presence.
    Rarely were these children mistreated. They were fed, they 
were warm in the winter, and they were kept out of harm's way. 
Their mothers knew that they were safe, and that is not 
unimportant in the troubled neighborhoods in which they live. 
But I rarely observed attempts to engage these children, much 
less to introduce them to the kind of formal daycare or early 
childhood stimulation that more fortunate children receive.
    One example from my research may serve to illustrate the 
problem. Danielle Wayne--this is a pseudonym--the divorced 
mother of three children, returned to the workforce during the 
course of my 8 years of following Harlem families. Her older 
children, ages 8 and 10, did very well in school, having 
benefitted from her undivided attention and engagement in their 
schools when they were very young.
    But her youngest child, a 2-year-old named Safiya, had a 
very different experience. When Danielle went back to work, she 
took Safiya to her ex-mother-in-law to be looked after during 
the day. At the cost of $50 a week, which was the most she 
could afford--and she was grateful for that care--the 60-year-
old grandmother accepted that child. I visited Safiya and her 
grandmother to see how she was doing and what she was doing 
during the day.
    Her daycare was in a 2-bedroom apartment in the public 
housing unit in the center of Harlem. Her grandmother had three 
other children to look after. The day I arrived, the TV set was 
set to the ``Jerry Springer'' show, and the kids were glancing 
up to see topless women.
    One of the grandmother's other children, a woman in her 
mid-30s, was sitting on the couch in a stupor. She explained to 
me that she had four teenaged children of her own but was no 
longer living with them. The grandmother explained to me later 
that her daughter had a serious drug problem and had nowhere 
else to turn for shelter.
    The best we could say about this childcare situation for 
Safiya is that it is custodial. And it is taking a toll on that 
little girl. At an age where children in early childhood 
education are playing active games, learning to help, to be in 
groups, starting to recognize their colors, Safiya had a 2-word 
vocabulary: ``no'' and ``shut up.'' That is it. She never said 
another thing to me or anyone else.
    In the setting where she was spending more than 8 hours a 
day, it is not likely she is going to learn much more than 
that. That is not going to put this little girl in a good 
position to enter kindergarten ready to learn.
    How do we avoid unproductive pathways like this? Well, in 
other countries the extension of universal or large-scale 
programs for preschool has become fairly common, and their 
experience reinforces the importance of this kind of 
opportunity.
    The studies that we have from these other countries are 
following children all the way from their early childhood to 
their adult years so we can see exactly what kind of impact 
that investment had.
    Let me just give you a few examples. In Denmark, the 
significant impact of preschool for children ages 1 through 6 
on completing schooling and on earnings at the age of 22 to 30 
is huge, and with larger effects for disadvantaged children.
    We see positive effects of preschool on grade retention, on 
test scores, on high school graduation, and on adult wages in 
France. Here, too, the effects are particularly large for 
children from disadvantaged households.
    More years in school, higher rates of college attendance, 
and greater labor market participation in Norway; again, the 
effects much larger for low-income children. Those are studies 
that can look at people all the way from zero to 30.
    We have other studies from Germany, India, Norway, Sweden, 
and Uruguay that just look at adolescents, and there too we see 
that earlier childhood education experience leads to better 
school enrollment and achievement, especially, by the way, for 
immigrant children, where exposure to the language of the host 
country is positively affected by entering school early and 
provides the maximum time for them to acclimate.
    What these studies are telling us is that early childhood 
education makes a very positive difference in the educational 
performance of children over the later years. What can the tax 
code contribute to this equation? The most important 
contribution it makes to educational outcomes for low-income 
families occurs, as you mentioned, through the Earned Income 
Tax Credit.
    One study that looked at the impact of receiving the EITC 
on the math and reading achievement of 5,000 children, matched 
to their mothers in the National Longitudinal Survey of Youth, 
found that a $1,000 increase in income generated by an 
increasingly generous EITC raised combined children's math and 
reading test scores by 6 percent of a standard deviation in the 
short run, and again the gains were larger for children from 
disadvantaged households.
    So what all of this research is telling us is that the 
injection of resources into households, either through the EITC 
or through income increases that mimic what the EITC provides 
for low-income households, is paying off in the educational 
performance of children. Those knock-on benefits of that 
improved track record surface later in the labor market and, 
hence, in intergenerational mobility.
    But what can you do to improve the chances that children 
from low-income households will stay that course? Specifically, 
what can the tax code do? Well, part of the answer, as you 
mentioned, is already with us: enlarge, or at least preserve, 
the Earned Income Tax Credit and the Child Tax Credit, both of 
which put resources in the hands of parents.
    There is a lot of debate about why that works as well as it 
does, or rather what the pathway is from higher household 
income to greater educational attainment and earnings. 
Candidate explanations include more money to spend on 
children's education, greater household stability, parents who 
are less stressed and hence do a better job of raising their 
children, and health outcomes which prevent the disruption to 
adult employment that can derail children or interrupt their 
own attachment to schooling. My guess is that all of these 
factors matter.
    When the States follow the lead of the Federal Government, 
the benefits of the EITC are amplified.
    The Chairman. I am going to have to ask you to wrap up the 
best you can, Doctor.
    Dr. Newman. All right. Let me do that.
    So let me just mention a few other instruments besides the 
EITC. I do not think we should forget the other age groups that 
may be affected by the investments we make possible. Let me 
speak about teenagers and young parents. Anything we can do 
through the tax code to encourage teens to stay in school and 
perform at higher levels will impact intergenerational 
mobility.
    Millions of inner city teens are left on their own in the 
after-hours of school. Supposing we were to provide tax 
incentives for parents to pursue high-quality after-school, as 
well as early childhood education? In addition, studies of 
long-term benefits of college education among young parents, 
especially mothers, on the mobility of the next generation show 
important results. First-time college students from low-income 
backgrounds raise their children differently than people from 
the same kinds of families who do not attend college. It is in 
college that they learn about the benefits of museums, reading 
aloud, doing homework, visiting the zoo, and so on.
    When we follow those kids 30 years later and we look at 
what the impact of education on their mothers was for their 
mobility, we see very significant effects on their educational 
performance. Hence, the American Opportunity Tax Credit, the 
Lifetime Learning Credit, all of these instruments through the 
tax code that make it possible for low-income people to attend 
college in greater numbers, pay off not only in their 
intergenerational mobility, but in that of their children.
    Thank you.
    The Chairman. Thank you, Dr. Newman, very much. Very 
interesting.
    [The prepared statement of Dr. Newman appears in the 
appendix.]
    The Chairman. Dr. Corak?

  STATEMENT OF DR. MILES CORAK, PROFESSOR, GRADUATE SCHOOL OF 
PUBLIC AND INTERNATIONAL AFFAIRS, UNIVERSITY OF OTTAWA, OTTAWA, 
                        ONTARIO, CANADA

    Dr. Corak. Thank you, Senator, for the opportunity to 
engage in this conversation.
    You summarized, I think, the facts on intergenerational 
mobility, and particularly international comparisons, quite 
clearly. What I would like to do in my 5 minutes is focus on 
the drivers. I think it is very important to understand the 
underlying causes, for two reasons.
    One is, because the facts that we are talking about relate 
to a group of people born in the 1960s who went to school in 
the 1970s and 1980s and participated in the labor market of the 
1990s and 2000s. So, if we wanted to get a sense of what will 
happen to the young people of today, we need to learn from that 
experience, understand what drove it, and make reasonable 
guesses in that sense. The other reason we have to focus on the 
drivers, of course, is because, if we want to do intelligent 
public policymaking, we have to understand the underlying 
causes.
    My first message to you is that there is no single silver 
bullet in this literature. The causes of intergenerational 
mobility are complex and they reflect the interaction of three 
broad forces: the family, the labor market, and public policy.
    Families that are stable and constructive can effectively 
raise their children and support them through all the 
transitions that they have to go through in their life, not 
just the early years, not just the primary schooling years, but 
also the teenaged years and the interface with the labor 
market. The stronger families are, the more mobility there will 
be.
    Second, the more inequality in labor markets there is, the 
less mobility there is; more unequal labor markets with a 
higher return to education change incentives and change 
opportunities for families and lead to less mobility.
    Finally, the third row is public policy. Public policy, to 
the extent that it is progressive, to the extent that it is 
relatively more advantageous to the relatively disadvantaged, 
will promote mobility.
    So, in the time that I have, I just want to talk about two 
stereotypical societies, if you will, in which the interaction 
between these forces is very different. The first society I 
will call a ``2nd-chance society.'' Canada and Australia might 
be 2nd-chance societies, if you will.
    The second is a society that has more tracks to it. If you 
get on the right track, you are destined to move forward, or 
you could move backward. There are not as many second chances. 
I will call this sort of a ``3-strikes-you-are-out'' society, 
if you will. The U.K. and the U.S. might sit towards that 
extreme.
    In a 2nd-chance society, families are able to invest, not 
just in the monetary well-being of the children, but also the 
non-monetary well-being. So money matters, but not just money. 
If we structured income support in a conditional way to young 
families, for example, and used something like the EITC, we 
should also recognize that the non-monetary resources available 
to children are also diminished, that we also have to provide 
more flexibility in work arrangements so that parents can 
balance the stresses of work and life more constructively. We 
also need more effective and creative child care to counter the 
kind of difficulties that Dr. Newman just spoke about.
    Second-chance societies keep the relative and absolute 
poverty rate of children low, and they also reduce the risk of 
poverty of expectations and poverty of experience.
    In the early years, 2nd-chance societies move towards fully 
integrating children into the schooling system. In many 
societies, particularly in Canada and Australia, there is talk 
and movement towards full participation of 4- and 5-year-olds 
in the schooling system on a full-time basis.
    In 3-strike societies, we begin to see in the early years a 
differentiation according to family resources, with more use of 
private sector resources on high-income families, and other 
families dropping by the wayside.
    Second-chance societies also allow children to drop in. 
There is always the risk of dropping out, but education systems 
are created more flexibly so that children can drop in later on 
in life. In 3-strike societies, it is much harder to drop back 
into school at a later stage in life, and the education system 
is structured very linearly.
    Quality also does not vary very much. The quality of the 
schooling system does not vary very much in 2nd-chance 
societies. The funding for the schooling system is more broadly 
based and not necessarily based on a narrow property tax basis, 
and the quality of schooling does not get reflected in the 
housing market to the same extent it does in 3-strike 
societies. So funding the schooling system through a narrow 
property base accentuates labor market inequalities, and they 
get interfaced into the family.
    Finally, I want to point to the fact that post-secondary 
education offers a lot more choices in 2nd-chance societies. 
There is a developed technical stream and community colleges as 
an alternative to university. While there may be high tuition 
fees, there are also strong bursaries.
    To the extent that people use loans, 2nd-chance societies 
make the repayment of those loans contingent on income so that 
you do not necessarily have to be bound by these heavy debts to 
the same extent if you experience spells of unemployment.
    Finally, I would point out that, in the interface with the 
labor market, connections matter. Families continue to play a 
role in helping their young adults transition to the labor 
market. In some societies, as many as 4 out of 10 young 
children have at some point worked for the same employer as 
their father.
    Also, if there are internships used, they are much more 
broadly based. One can imagine a system in which people from 
lower socioeconomic backgrounds have a voucher attached with 
them so that they can accept unpaid internships and get payment 
from the States so that internships are not based necessarily 
on just family background.
    Finally, in 2nd-chance societies there are wealth or estate 
taxes, or inheritance taxes, that level the playing field for 
the next generation and ensure a virtuous circle.
    Thank you very much.
    The Chairman. Thank you, Dr. Corak. That was very 
interesting.
    [The prepared statement of Dr. Corak appears in the 
appendix.]
    The Chairman. Dr. Lefgren, you are next.

    STATEMENT OF DR. LARS J. LEFGREN, ASSOCIATE PROFESSOR, 
 DEPARTMENT OF ECONOMICS, BRIGHAM YOUNG UNIVERSITY, SALT LAKE 
                            CITY, UT

    Dr. Lefgren. Thank you, Chairman Baucus and members of the 
committee.
    In the United States, a 10-percent wage disadvantage in 
fathers' long-term income translates into roughly a 6-percent 
wage disadvantage in a son's long-term income. This suggests 
that the son of a poor father will have a strong tendency to 
have low income himself. Estimates from other developed 
countries, as you mentioned, Senator Baucus, imply much less 
persistence in income levels from father to son.
    These results have caused consternation because they appear 
to refute the premise of the American dream that anyone can be 
successful. Indeed, if a person's economic position is 
determined entirely by the economic position of one's parents, 
independent of the person's skill or potential, there would be 
nearly universal condemnation of the institutions that led to 
such an unfair outcome.
    Furthermore, it would lead to a poorer society as the 
mediocre children of wealthy parents were promoted to jobs 
beyond their capabilities, while the brightest children of the 
poor languished in occupations that failed to harness their 
full potential.
    It would be equally symptomatic, however, of poor labor 
market institutions if there was no correlation between 
parents' income and that of their children, because capable 
parents tend to have capable children. So, for example, the 
heritability of IQ is on the order of 0.7. A zero correlation 
between the incomes of children and parents suggests that our 
labor market fails to reward skill.
    Rewards for skill and hard work are essential signals for 
sorting our most talented workers to the fields and occupations 
in which they produce the most value. When we fail to allocate 
skill to its highest productivity use, we become poorer as a 
society.
    I will now compare the special cases of Sweden and the 
United States. These countries represent the extremes of 
observed intergenerational income inequality in the developed 
world. The comparison highlights the tension between economic 
efficiency and equality as well as the importance of efficient 
human capital investments.
    The degree to which paternal income difference persists to 
the next generations is about 26 percent in Sweden, compared to 
61 percent in the United States. While Sweden is a more 
egalitarian country, Swedish citizens have lower incomes on 
average than do Americans. Once one adjusts for how much goods 
and services cost in Sweden, per capita GDP is about 20 percent 
less in Sweden than it is in the United States.
    Sweden achieves this level of equality in several ways. 
Generous wages for many occupations are collectively bargained 
at the industry level and assume the role of the mandated 
minimum wage in other countries. A large public sector provides 
many individuals with a middle-class lifestyle. High taxes 
substantially reduce differences in take-home pay across 
workers. Aronsson and Walker discuss how these labor market 
institutions create incentives to limit work hours and 
educational investments.
    These institutions also dole out incentives for individuals 
to enter demanding occupations where the value of their work 
product is high as opposed to pleasurable, but potentially less 
useful, occupations. High-quality public preschools, as well as 
primary, secondary, and college education, are provided to all 
citizens at little or no cost.
    Conversely, in the United States, levels of unionization 
are low and falling. The minimum wage is low and binds for only 
a small fraction of the population. Tax rates and the size of 
the public sector are both low relative to other developed 
countries. The financial return to education is quite high.
    Collectively, the tax code and labor market institutions of 
the United States do relatively little to equalize incomes at a 
point in time or across generations. They do, however, provide 
an efficient environment for individuals to undertake 
educational investments and to employ their skills in a setting 
in which they are most highly valued.
    In the United States, primary and secondary school is 
provided free of cost. Access to publicly provided preschools 
through programs such as Head Start is available to some, but 
not all, families. Individuals have access to low-cost 
community and State colleges, and also have access to loans and 
grants to cover remaining expenses.
    For well-prepared students, the United States has the best 
university system in the world. The United States does not, 
however, provide a strong educational foundation to the 
disadvantaged children. In Chicago, only 56 percent of students 
graduate from high school. Most of those who drop out and many 
of those who graduate have substandard numeracy and literacy 
skills.
    While existing programs such as No Child Left Behind and 
title I have had some mixed success in increasing student 
achievement, improvements in educational policies should be an 
ongoing congressional priority. Research by Heckman and others 
underscores the importance of early childhood education in the 
formation of the soft skills required for success in school 
life and the workplace.
    In conclusion, it is unclear what the right level of 
intergenerational income mobility ought to be. Tax and labor 
market policies designed to foster an egalitarian wage 
distribution and high levels of intergenerational mobility 
distort incentives for efficient educational investments, 
occupational choices, and effort levels.
    In this regard, Congress must thoughtfully consider the 
trade-offs between economic efficiency and equality. However, 
the failure to foster the educational development and success 
of all of America's children stunts the economic potential of 
many citizens, lowers our collective national wealth, and 
increases intergenerational inequality in a manner that most 
Americans, I believe, would consider unfair.
    Thank you.
    The Chairman. Thank you, Dr. Lefgren.
    [The prepared statement of Dr. Lefgren appears in the 
appendix.]
    The Chairman. Ms. Currier?

 STATEMENT OF ERIN CURRIER, PROJECT MANAGER, ECONOMIC MOBILITY 
       PROJECT, THE PEW CHARITABLE TRUSTS, WASHINGTON, DC

    Ms. Currier. Chairman Baucus and members of the committee, 
thank you for inviting me to testify today. I manage Pew's 
Economic Mobility Project, which is a nonpartisan effort to 
establish a fact base on economic mobility.
    Today our project released the newest data available on 
intergenerational mobility in the United States, revealing a 
mixed picture of Americans' access to opportunity.
    On the one hand, there is a glass half full, because 84 
percent of Americans have higher family incomes than their 
parents did at the same age, and across all levels of the 
income distribution this generation is doing better than the 
one that came before.
    But there is also a glass half empty, because Americans 
raised at the top and bottom of the income distribution are 
highly likely to stay where their parents were, a phenomenon 
called ``stickiness at the ends.''
    Of those whose parents were in the bottom fifth of the 
income distribution, 70 percent remain below the middle as 
adults. Of those raised at the top of the income ladder, 63 
percent never fall to the middle as adults. This stickiness at 
the ends challenges the notion that the United States promotes 
equality of opportunity. It is further underscored, however, by 
international comparisons of economic mobility, which show that 
the United States has less relative mobility than Canada and 
many European nations.
    A recent study on economic mobility across 10 countries 
found that, in the United States, there is a stronger link 
between parental background and children's outcomes than in any 
other country investigated. The research found that family 
background begins affecting children's outcomes as early as 
they can first be measured, even by age 3.
    The variation in outcomes across countries suggests that 
policies and institutions can and do influence economic 
mobility. A person's mobility outcome is not predetermined, and 
understanding the drivers of economic mobility can enhance 
opportunity in America.
    Our research has found that a host of factors help push 
Americans up the economic ladder, and some push them down. 
Today I will mention three such factors: post-secondary 
education; savings; and neighborhood poverty.
    Post-secondary education is extremely powerful. It both 
promotes upward economic mobility from the bottom and protects 
against downward mobility from the top and the middle. Having a 
4-year degree triples the chances that someone who starts in 
the bottom income quintile will make it all the way to the top.
    Personal savings are also influential. When families are 
able to create their own safety nets, they are less likely to 
be derailed by financial emergencies and are more equipped to 
make mobility-
enhancing investments such as college for themselves and their 
children.
    On the other hand, one of the most powerful drivers of 
downward mobility is being raised in a high-poverty 
neighborhood. Americans raised in the top three quintiles who 
spend their childhood in a high-poverty neighborhood are 52 
percent more likely to be downwardly mobile.
    Considering this data, it is important to assess the degree 
to which Federal policy is mobility-enhancing and who benefits 
from the investments currently made. In fact, the government 
spends a great deal to encourage movement up the economic 
ladder, but, because the vast majority of that spending is 
delivered through the tax code, it largely misses families at 
the bottom who do not owe income taxes.
    In 2009, a group of bipartisan advisors to the Economic 
Mobility Project drafted a set of policy recommendations to 
enhance economic mobility in the U.S. They called for a 
portfolio shift in Federal investments to better target low- 
and moderate-income families. Public opinion polling suggests 
Americans support this goal. An overwhelming 83 percent want 
the government to boost mobility for the poor and middle class, 
a feeling that cuts across party lines.
    Americans believe in the American dream, and they also 
believe that our Nation is, and should be, exceptional in its 
ability to promote opportunity for all citizens, regardless of 
family background. Still, Americans are increasingly concerned 
about their children's economic chances and believe that 
policymakers can, and should, help level the playing field.
    An emerging body of research provides insight into the 
drivers that influence economic mobility and serves as a 
starting point for dialogue and action on how to promote 
economic mobility for all Americans.
    Thank you.
    The Chairman. Thank you, Ms. Currier.
    [The prepared statement of Ms. Currier appears in the 
appendix.]
    The Chairman. Dr. Steuerle?

   STATEMENT OF DR. C. EUGENE STEUERLE, INSTITUTE FELLOW AND 
  RICHARD B. FISHER CHAIR, THE URBAN INSTITUTE, WASHINGTON, DC

    Dr. Steuerle. Thank you, Mr. Chairman, Mr. Wyden, Mr. 
Thune. It is a privilege to testify before you again. Nothing 
exemplifies the American dream more than the possibility that 
each family can get ahead, and through hard work advance from 
generation to generation. No committee, I believe, in Congress 
has more influence over this issue than does the Senate Finance 
Committee.
    I am not claiming government can solve these problems. I 
think mobility is largely induced by the hard work and the 
efforts of our citizens, but this committee has a great deal to 
say about how government makes possibilities available.
    Today, I suggest that mobility across generations is 
threatened by three aspects of current Federal policy. First, 
we have a budget for a declining Nation. It is one that 
promotes consumption ever more and investment, particularly in 
the young, ever less.
    Second, we have relatively high disincentives to work and 
save, especially for those who move beyond about a poverty 
level of income. Third, we have a budget that, largely through 
the tax code, favors mobility for those with higher incomes, 
while promoting consumption but discouraging mobility for those 
with lower incomes.
    So let me elaborate briefly. First, in many ways we have a 
budget for a declining Nation. Even if we would bring our 
budget into balance or to sustainability--and we are a long way 
from achieving that goal--we would still have a budget that 
allocates smaller shares of our tax subsidies and our spending 
to children and investment and ever-larger shares to 
consumption.
    Right now, the Federal Government is on track to spend 
about a trillion dollars more annually in a decade in spending 
and tax subsidies. The number might be slightly smaller if the 
Republicans are in power, it might be slightly larger if the 
Democrats are in power. That is a trillion dollars more 
annually that is scheduled to be spent.
    Yet, if you look at those projections, you will find that 
the programs that might promote mobility, such as education or 
job subsidies or programs for children, would get nary a dime 
of that trillion dollars more a year. Right now, those relative 
choices are reflected in both Democratic and Republican 
budgets.
    Second, consider that one of the many ways that the 
population rises in status relative to others is by working 
hard and saving a higher portion of their income or their 
wealth. Discouraging such efforts can reduce the extent of 
intergenerational mobility, which I will remind you is largely 
measured by their command over private income and private 
resources, not their command over public resources.
    One way to look at the disincentives facing lower-income 
households is to consider the effective tax rates that derive 
from combining together the direct taxes that you see in the 
tax system and the phase-outs that are prevalent in so many of 
the tax subsidies in welfare and benefit programs.
    After reaching about a poverty-level income, those 
moderate-
income households with children often face marginal tax rates 
that are 60, 80, or even 100 percent when they earn an 
additional dime of income.
    Finally, in a study I led for The Pew Economic Mobility 
Project with Ms. Currier here, we concluded that a sizeable 
slice of the Federal budget--in fact, about $746 billion, or 
$7,000 per household in 2006--did go to programs that arguably 
tried to promote mobility.
    Unfortunately, almost three-quarters of the total comes 
mainly through programs such as tax subsidies for home 
ownership and other saving incentives that flow mainly to 
middle- and upper-
income households. Moreover, some of these programs inflate key 
prices, such as the prices of homes, and thereby actually 
detract from the mobility of low- and moderate-income 
households.
    Finally, I would like to add a note about some current 
opportunities. Outside of education, and particularly early 
childhood education and health, if Congress wishes to promote 
the mobility of lower-income households as well as protect the 
past gains of moderate- and middle-income households that are 
also now threatened, almost nothing succeeds more than putting 
them on a path of increasing ownership of financial and 
physical assets that can carry forward from generation to 
generation.
    Two opportunities largely neglected in today's debates may 
be sitting right at our feet. First, rents have now moved above 
home ownership costs in many parts of the country. 
Unfortunately, we seem to have adopted a housing policy in this 
Nation that encourages low-income households to buy when the 
market prices are high, and then, when the market prices drop, 
we encourage them to sell and not to buy. This does not seem to 
me to be a particularly advantageous home ownership policy for 
these households.
    Second, pension reform is a natural accompaniment and add-
on. I am not referring to the old individual account debate, 
but I am talking about pension reform. It is a natural add-on 
to the Social Security reform that I believe is around the 
corner that is often not being discussed. So, I hope you will 
give some consideration to these two opportunities.
    In conclusion, the hard future ahead for programs that help 
children, invest in our future, and promote mobility for low- 
and 
moderate-income households does not necessarily reflect the 
aspirations of the American people, or I believe of either 
political party, and I appreciate the efforts of this committee 
in moving on this front today.
    Thank you.
    [The prepared statement of Dr. Steuerle appears in the 
appendix.]
    The Chairman. Well, thank you all. I am going to start with 
you, Dr. Corak. I do not know if you suggested many specific 
suggestions as to what we can do in this committee to address 
the phenomena you are talking about, the 2nd-chance and 3-
strikes-you-are-out. I assume 2nd-chance is your preferred 
choice between the two. But just, what would you advise that 
this committee consider to help kids, help more mobility? That 
is the subject of this hearing.
    Dr. Corak. Well, different policies at different stages of 
the child's life cycle. Perhaps, let me focus on the very last 
stage of the transition to the labor market. What I was trying 
to say, for example, is that children from more privileged 
backgrounds have more opportunities and more connections 
available to them.
    Let us imagine how internships work in this country. My 
understanding is that many internships are unpaid, and this is 
valuable job experience for young people. They have to be able 
to afford to take an unpaid internship, and that involves 
family support. So these internships generally, or the more 
valuable ones, may go to people of more privileged backgrounds.
    Why not give to children of less-privileged backgrounds a 
voucher, if you will? If they find an unpaid internship, the 
State will support them for that summer and give them that kind 
of work experience. That is one example.
    The Chairman. Let me ask all five of you your reaction to 
this. What about universal service, with every younger person 
in America from the ages of, say, 18 to 22 or 23, whatever, 
having to serve in the Peace Corps, or military service, for a 
couple of years? My thought is that it would be a way for our 
younger people to learn about other people, learn about the 
world, learn about other people's conditions, and have a very 
positive educational effect. I do not know what the latest 
studies are, how expensive it would be.
    I mean, clearly I could think of some people who would say, 
oh, no, that impinges on our individual freedoms or our 
liberties and so forth. But my thought is, if it could be made 
to work, it would help bring America together again. I think 
about World War II and all of that, we were a country together 
and so forth. We were together in World War II.
    Now, of course we had an external threat, an existential 
threat back then. But we are being threatened now. It is a 
stealth threat. It is harder to see, but it is out there. I 
mean, this is just stunning that we are no longer the number-
one country in the world in mobility, and we are sinking, I 
think, in that respect.
    So I would just like your candid, honest thoughts whether 
universal service would help or not help, whether it is 
something we should think about. Is it just not worth thinking 
about, and let us try to find other ways to deal with this 
issue? I will go the other way and go down this way this time. 
Dr. Steuerle?
    Dr. Steuerle. Senator, I am not sure that I would mandate 
universal service, but I think we could make many of the types 
of programs that we provide to the public conditional upon 
service, such as, aid for college could be limited, or people 
could avoid having to pay off their loans if they participate 
in service. I think we should also perhaps require that doctors 
who go through medical school provide some sort of service in 
exchange for all the subsidies they get. I think there are a 
lot of ways of encouraging service. I do not know that you 
would have to go all the way to a mandate.
    The Chairman. So you would look creatively to find ways to 
get incentives to serve on a voluntary basis?
    Dr. Steuerle. Yes.
    The Chairman. That is your suggestion. All right.
    Ms. Currier?
    Ms. Currier. Well, I guess I will pivot a little bit and 
just mention that our project has conducted two public opinion 
polls, one in 2009 and one in 2011. In both cases, Americans 
solidly identified things like hard work and ambition as the 
key drivers of mobility.
    But they also believe that the government has a role to 
play in helping level the playing field to the degree that 
policies can do that, can expose children from all backgrounds 
to better educational attainment, better jobs, better labor 
force participation. I think you would see quite a bit of 
support from the American public.
    The Chairman. All right.
    Dr. Lefgren?
    Dr. Lefgren. I am personally actually very sympathetic to 
the benefits of service. If service is mandated, in my opinion, 
then it loses much of the potential benefits. Mandated charity 
really is not charity at all.
    Even though I am actually very sympathetic with Dr. 
Steuerle's view that there are potential levers to provide 
incentives for service, I think a key aspect of the growth 
aspects of service and sacrifice is the voluntary nature of it, 
and it is important that people bear some of the costs of the 
service that they are getting.
    The Chairman. Yes. I appreciate that. We will have two more 
to answer. For whatever it is worth, my son went to school 
where service was ``required.'' Community service was required. 
It is clear to me he is a much better person as a consequence, 
there is no question about it. But that is a little bit 
different.
    Dr. Corak?
    Dr. Corak. I think your call for that option sort of 
reflects a need to develop community in a spirit of the 
collective. My own sense is--I am not informed on what the 
long-term benefits of service at the later part of the age 
spectrum would be, but I can certainly imagine starting that 
much earlier in the schooling years, in the sense of universal 
provision of high-quality care in the early years. It would 
seem to me the community would have to start much earlier than 
that.
    There is also the possibility certainly of having volunteer 
hours attached to the possibility of graduating from high 
school, so you could imagine having each child spend a certain 
amount of time in some community-oriented activity, and they 
would have to have X number of hours to graduate.
    The Chairman. All right.
    Dr. Newman?
    Dr. Newman. Mr. Chairman, I am very sympathetic to your 
point of view. I think universal institutions generally do pay 
off in mobility. That is what public schools are all about. 
What you suggested is sort of an extension, if you will, of the 
same idea, that all Americans would have the opportunity to 
serve. This is beyond the high school level. But what they 
learn when they do are new skills, new opportunities, new ways 
of doing work, new cultures, as you have said.
    In that sense, universal service provides the same kind of 
human capital benefit that the other universal institutions we 
have do. So I think anything that you can do through this 
committee to extend opportunities to all Americans, starting at 
the earliest ages and carrying them all the way through to that 
later and later transition to adulthood in the mid-20s, would 
be enormously beneficial.
    The Chairman. Thank you very much. My time has expired.
    We are honored to have the Senator from Utah, Senator 
Hatch, with us today. Senator?
    Senator Hatch. I am happy to be with you.
    The Chairman. The ranking member of this committee.
    Senator Hatch. I will put my opening statement in the 
record.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    Senator Hatch. I apologize for being late, but I was on the 
floor making some remarks that had to be made.
    We welcome all of you, especially you, Dr. Lefgren, from 
Brigham Young University. We are really happy to have you here, 
and all of you, as a matter of fact.
    Let me start with you, Dr. Corak. Figure 2 in your written 
testimony, which has recently been labeled the Great Gatsby 
Curve, shows the correlation between measures of inequality and 
mobility across countries. Now, there are, of course, 
measurement issues associated with the data. Not everyone would 
agree with the inequality measure, perhaps, that you use.
    In any case, your Gatsby Curve shows a positive relation 
between inequality and lack of mobility across countries. You 
suggest that the positive relation can give us a ``rough'' way 
to see outcomes of all of the forces governing 
intergenerational earnings and inequality.
    You also say in your testimony that ``this picture is one 
of association,'' yet you have written elsewhere that ``to 
dismiss this relationship as purely a statistical artifact or 
myth, with there being no causal impact between inequality and 
opportunity, would be a mistake.''
    I certainly do not dismiss your relationship as necessarily 
being an artifact or myth, but it is important not to confuse 
association with causality. Nonetheless, some people go so far 
as to use the rough correlation you present to make structural 
forecasts about how inequality today will influence mobility in 
the future. And while I do not doubt the association you 
present, given the data that you use, I think it is a stretch 
to treat it as structural and something that can be used for 
forecasting.
    So I have a couple of questions intended to help me 
understand what your figures are supposed to show. First, do 
you believe that your Gatsby Curve establishes statistically 
that lower mobility in a country, from whatever year your 
mobility data may have been obtained, causes the inequality 
measures that you say are estimates from ``around the year 
2000,'' or maybe that greater inequality around the year 2000 
somehow was caused by less mobility for children who were born 
and reared decades ago in far different policy and economic 
environments?
    Second, I wonder if you could discuss evidence that the 
U.S. is moving up your curve and how robust the evidence is 
across various measures of inequality.
    Finally, you have recently been quoted as saying that ``the 
most important thing that the U.S. is leaving behind as it 
moves up the Great Gatsby Curve is the vision of itself.''
    So I wonder why you take from your curve or other research 
an impression that we in the United States are losing our 
vision of ourselves.
    Dr. Corak. Well, thank you, Senator.
    Senator Hatch. The question was too long, I know.
    Dr. Corak. Yes. But let me divide it up into the three that 
you suggested. First, is the relationship causal? Let me make 
clear, Senator, that I do not believe that if you simply gave 
people money, you would solve all of these problems.
    Money certainly matters. People in lower incomes certainly 
face stresses in life, but more than money matters. That is why 
we should not interpret that curve as something that we can 
move along by just tax-and-transfer policies, for example. It 
is not causal in that sense.
    It is a nice way of describing a whole series of 
transitions, or the outcome of transitions that children make 
through their lives. Inequalities begin to get imbedded in 
children's lives in the early years. We know that there are 
inequalities in health outcomes in the very early years. That 
is one causal step that helps build that figure.
    We know that there are inequalities across neighborhoods 
and schooling. Those are causal. They build another step. We 
know that there are inequalities to good jobs and access to 
good jobs. That is another layer that gets played onto the 
whole process. In the end, you get a picture of that sort.
    As for losing our vision of ourselves, all I am stating in 
that statement, which was in, I believe, Business Week earlier 
this week, is the concern of this committee right now, the 
concern that all children should be able to become all that 
they can be.
    In the United States, if you look closely at the data, 
there is in fact a good deal of mobility in the middle parts. 
What makes society different is the stickiness at the two ends. 
That is related to inequalities in the labor market and access 
to important institutions. If those continue to grow and 
exacerbate over time, it is hard to imagine the situation 
changing for the current generation compared to the people who 
were part of that graph. Does that help?
    Senator Hatch. That helps. That helps a little bit.
    I will turn to Senator Wyden.
    Senator Wyden. Thank you very much, Mr. Chairman. I want to 
thank all of you.
    Let me begin, if I might, with you, Dr. Steuerle. You have 
been a veteran of the tax reform wars. I believe real tax 
reform gives everybody, not just those who are born on third 
base, the opportunity to get ahead. The current tax system 
primarily benefits those who own the ballpark.
    When you look at your numbers in particular, you come to 
the conclusion that, under the current tax code, the younger 
you are, the less income you make, the less our government does 
to boost opportunity for you to get ahead. That sure is a 
poster child for a tax system that is in the business of 
picking winners.
    So my first question to you is, would it not make sense, as 
a fundamental principle of tax reform, to clean out a lot of 
the special interest clutter, to hold down rates for everybody, 
and use it as a ladder to create more opportunity, especially 
for young people who are not getting those opportunities early 
on that you have described?
    Dr. Steuerle. Senator Wyden, I certainly agree with your 
conclusion, but let me try to answer this in a way that I think 
is fairly bipartisan.
    Senator Wyden. What I have described, as you know, is what 
Senator Coats and I have offered. It does not get more 
bipartisan than that.
    Dr. Steuerle. That is what I said: I am agreeing with you 
on that. I guess where I am going along that path is, I want to 
distinguish between size of government and allocation. The 
issues you are raising have to do with how we allocate the 
budgets, which also, I think, reflects a little bit the 
previous question, the previous discussion.
    We actually have a social welfare budget in the United 
States, via the tax subsidies and the direct spending, of about 
$30,000 a household. That is not a trivial budget. We could 
argue whether it should be $35,000 or $25,000. A lot of it is 
in the tax code, a lot of it is in other parts of the direct 
spending system.
    There are ways of taking that money and reallocating it so 
that it more favors, not just lower-income households that are 
excluded from some of these tax breaks you are talking about, 
but also so that it moves more on the mobility side of the 
budget.
    I kept emphasizing that what we have now is a budget that 
favors consumption, so low-income households are not left out, 
for instance, of the housing programs. But they are encouraged, 
for instance, to take rental housing where they might get 
rental subsidies, but not to own, whereas the subsidies for 
ownership, which are in the tax code, they are not encouraged 
to participate in.
    So it is not just upside-down in the tax code, it is 
upside-down across both the tax code and the social welfare 
system. I think there are ways of reallocating this money that 
would favor mobility in ways that I think that both political 
parties would favor. Many of these are in the tax code, many of 
them are also in the social welfare system.
    Senator Wyden. Ms. Currier, let me turn to you, because I 
think you all are doing extremely important work as it relates 
to upward mobility at Pew. I am especially attracted to your 
ideas about personal savings. I mean, in effect this is an 
opportunity for a family to create their own safety net.
    In this regard, Senator Coats and I have proposed creating 
a new American Dream account which could be used for any 
purpose. What we would like to do is particularly address some 
of the judgments that you are making in terms of how young 
people could benefit from enhanced savings.
    How would you go about, at this point, setting up a new 
kind of savings opportunity? Where would you start it, and how 
would you use it in a way so as to create the best possible 
array of incentives for young people?
    Ms. Currier. Well, I think, as you know, our project has 
been fortunate enough since its inception to work with a 
bipartisan group of thought leaders and advocates, including 
Dr. Steuerle. They reflect views from across the political 
spectrum.
    A few years ago, they worked with our project to develop a 
set of policy recommendations that they unanimously agreed 
would enhance economic mobility. One set of those policy 
recommendations falls under the category of financial capital 
and includes a host of recommendations specifically about ways 
that families across the income distribution can develop 
savings.
    One of their policies includes child savings accounts and 
establishing accounts early in life so that children from the 
very beginning have opportunities to become more financially 
literate, build expectations for themselves about how that 
money could be used for human capital development, and also tap 
into behavioral economics, giving people an easier opportunity 
to invest in themselves and their children.
    Senator Wyden. Mr. Chairman, if I could just ask one 
additional question.
    On education--and I think I would like to ask you this 
question, Dr. Lefgren--Senator Rubio and I have teamed up to 
propose a bill on higher education. You have been very 
interested in this field over the years.
    What Senator Rubio and I are proposing is called the Right 
to Know Before You Go Act, so as to help particularly college-
bound students deal with this mountain of debt that so often 
they rack up. It has really become the 2nd-biggest investment, 
after buying a home, in their life.
    I know that you have looked at this issue, particularly as 
a springboard to economic mobility for young people. What kinds 
of Federal policies would you suggest that could help young 
people who are getting shellacked by these enormous debts that 
they are facing for higher education?
    Dr. Lefgren. One thing that I actually want to make clear 
is that higher education is still one of the best investments 
around. If you look at the economic literature, the returns 
from education have not been declining, they have actually been 
increasing over time.
    So I think it is important that, as we move forward, we do 
not send the message to our young people that higher education 
is a boondoggle or is a bad investment. It will, for most 
people, be the best investment that they can ever make.
    Now, there are a couple of problems. A lot of the mountains 
of debt, or the big problems, are people who go to expensive 
private colleges with a major in things that do not have a very 
high financial return, so there is an issue of major choice. 
Then there is also an issue where you look at some of the for-
profit colleges that cater to disadvantaged applicants. In some 
ways they provide an opportunity, but many of those people who 
go through those programs have very poor outcomes.
    I think what I would like is for there to be just a lot 
more information. For example, if colleges sort of gave 
information on what a typical labor market outcome is for 
people who go through their institution or people who go 
through their program, that would allow people to make informed 
decisions, but still make efficient decisions.
    Senator Wyden. That is exactly what Senator Rubio and I are 
proposing. We want young people to have that kind of 
information in front of them. The fact of the matter is, today, 
in many respects, you can get more information about buying a 
used car than you can about the point you are making in terms 
of what your economic prospects are when you get a degree from 
a particular school. So, we are going to be following up with 
you, because I think your point is spot-on. Thank you, Senator 
Hatch.
    Senator Hatch. Thank you.
    Senator Thune, we will turn to you.
    Senator Thune. Thank you, Mr. Chairman. I want to thank our 
witnesses for sharing their insights today. We have had some 
discussion from our witnesses about a range of tax provisions 
and other programs that affect economic mobility, but I would 
also suggest that the greatest driver of upward economic 
mobility is not a government program, but the ability to find a 
good-paying job. Unfortunately, right now the policies that we 
have in place have failed to create enough jobs to lift incomes 
and raise living standards.
    The lack of a robust economic recovery has fallen 
particularly hard on younger Americans. If you look at the 
statistics, there is a recent Brookings Institute study that 
found that the percentage of Americans aged 20 to 24 who were 
employed fell nearly 8 percent between 2007 and 2010. This 
compares to a decline of less than 1 percent for Americans over 
the age of 55.
    There is another study that estimated that a young person 
graduating from college today will earn roughly 17.5 percent 
less than they would if they had graduated during a stronger 
labor market. That translates into about $70,000 in lost income 
over a decade in time.
    So we can discuss specific government incentives at the 
margin, but I think we really need policies that promote job 
creation and keep taxes low and that provide, really, the 
economic certainty that I think our business owners and 
investors need. It seems to me, at least, that now would be a 
really bad time to implement large tax increases on the people 
who create jobs and our entrepreneurs out there.
    I want to just get your reaction to an issue that bears 
pretty heavily in the part of the country where I am from, and 
that has to do with the death tax, the estate tax. There is a 
lot of discussion about that and how much revenue it raises 
relative to the cost of compliance and other things.
    But one of the things that we do know affects economic 
mobility is the ability to save money over time. For many 
families, their small business is their savings. For these 
families, the Federal estate tax, or as I referred to it, the 
death tax, makes it more difficult for savings and wealth to 
pass from one generation to the next. It is especially true in 
rural areas of the country.
    According to the Department of Agriculture, farm real 
estate accounted for 84 percent of U.S. farm assets in 2009. 
For these farmers, who are land-rich and cash-poor and who have 
seen land valuations rise dramatically in many parts of the 
country, the death tax reverting to a top rate of 55 percent 
next year, coupled with an exemption amount of only $1 million, 
would be devastating.
    If we want to help Americans save for the future, and if we 
want to improve economic mobility, we need to make sure that 
the Federal death tax does not result in the liquidation of 
businesses that have been built up over a lifetime through many 
years of hard work.
    I guess I am just interested in your perspective on how 
that issue bears on this ability to transfer 
intergenerationally small businesses that would allow that next 
generation to achieve a higher standard of living. And 
particularly--I do not know if any of you can speak to this--
from a rural perspective, farm and ranch families that I know 
of--in fact, I had someone mention to me just the other day, 
with the land values that we are seeing in many parts of the 
country today, you really can be land-rich and cash-poor and, 
when that time comes, end up having to liquidate a lot of your 
assets just to pay the IRS. That seems like a fairly 
counterproductive thing to do if you are interested in 
sustaining some of these businesses and creating economic 
opportunity for future generations.
    Does anybody want to comment on that?
    Dr. Lefgren. I will comment for a moment. It is my 
recollection that the estate tax, even when the tax rates are 
higher, actually does not generate very much revenue because 
there are so many mechanisms that families have to estate plan 
prior to the passing. So in some ways, it is likely the case 
that the incentive effects of the estate tax, in terms of tax 
avoidance and that, are likely high relative to the financial 
benefits of increasing the tax.
    In countries like Sweden, they actually have high tax rates 
on labor income and actually relatively low tax rates on 
capital, because of the incentive effects. However, it is not 
obviously clear to me why there is something special about 
farmers relative to other people, for example, people who own 
expensive homes that have been in the family for a generation. 
It is not clear to me that that is sort of solving the problem 
or that the inheritance tax is something that is an obstacle to 
mobility. But I think the revenue effects, however, are pretty 
small, so it is probably a 2nd-order issue in terms of----
    Dr. Steuerle. Senator Thune, can I suggest that most of the 
data that we examine here is for the broad swath of the 
population, and I do not know if we could find the estate tax 
to say that the top 1 percent of wealth holders--I do not know 
how much that would actually show up even in our statistics.
    I mean, a lot of what we are talking about on 
intergenerational mobility particularly, is people near the 
bottom being able to rise up to the middle and even, say, top 
quartile, but not even necessarily the top 1 or 2 percent. I 
would suggest you might want to think about, if there is going 
to be a continuation of an estate tax at whatever rate, that it 
be divided into a capital gains at death and an estate tax.
    So instead of, say, a 30-percent cap death estate tax, you 
might think of a 15-percent capital gains tax and a 15-percent 
estate tax, which I think actually ameliorates a number of 
problems, although it may not solve the problem for the farmer 
who has had huge amounts of capital gains.
    Senator Thune. Right. Good. All right. It is probably 
somewhat unique to more the middle of the country. I mean, it 
is not unique in the sense that you have a lot of small 
businesses that deal with this, but I think in terms of farm 
and ranch families who do work very, very hard, and in many 
cases because of the value of their operations--which at one 
time with land values were not what they are relative to today, 
but we have seen these land values increase dramatically.
    So now you have what would probably be characterized by 
many as a relatively small farm that has a pretty high value, 
and you would experience a significant amount of tax liability 
when one family member dies and passes that on to the next 
generation, which is what we try to encourage where I am from. 
You want people to continue to stay in farming, ranching, and 
agriculture. This has become a real detriment to that and a 
real obstacle to that, but that may be, again, a factor that is 
somewhat unique to where I am from.
    Dr. Steuerle. And I think it is somewhat easy to exempt 
most of the farmers in that situation. I mean, depending on how 
we design it as well.
    Senator Thune. You could, if you designed it the right way. 
But as of January 1st of next year, the exemption level goes 
down to a million dollars and the top rate goes up to 55 
percent. If you have a 1,000-acre farm at $5,000 an acre on 
that farm, you are at $5 million right there, and that does not 
include equipment or anything else.
    Dr. Steuerle. I think $1 million is very low. My 
calculations on the lifetime value of Social Security and 
Medicare benefits is they are close to $1 million for a couple, 
too.
    Senator Thune. Right.
    Dr. Steuerle. So we are getting up pretty close to middle-
class assets, at least at some level.
    Senator Thune. All right. Thank you.
    Thank you, Mr. Chairman. My time has expired.
    The Chairman. Thank you, Senator.
    I might chime in with the remarks of the Senator from South 
Dakota. In my part of the country, that is a real issue, for 
the reasons that he indicated.
    I wonder, what do we do about crime in cities, inner 
cities? There have been reports in the last several days about 
the murder rate going up in Chicago. The new mayor, Rahm 
Emanuel, is trying to address it, and doing a very good job. 
Chicago is a great city. But my sense is that, in a lot of 
these cases, if you are born into a part of a city where all 
you see is gang warfare, that is probably what you are going to 
end up doing, being a gang member.
    I do not know how you break that cycle. What do you do in 
these neighborhoods? It is a crazy thing to say, but I have 
been home in my State of Montana for 10 days, and I came back 
yesterday, and all I heard was a bunch of sirens, cops chasing 
after people, and they got hold of somebody, about eight squad 
cars just a block from where I live. My gosh, we do not have 
this in Montana. But it is here, and it is in other cities 
around the country.
    So, it is tough. How do you address mobility when you are 
born in the inner city and all you see is crime, a single 
parent, if you are lucky? How do you deal with that? Anybody?
    Dr. Lefgren. Can I?
    The Chairman. Yes.
    Dr. Lefgren. This is something that I have done some 
research on. There is good work by Lance Lochner and others 
that looks at the impact of educational investments on 
subsequent criminal activity. So in the long run, encouraging 
the same investments that promote upward mobility actually 
leads to reductions in criminal behavior. There is also 
literature by Steven Raphael and David Mustard, who look at the 
impact of labor market opportunities on criminal behavior.
    So a lot of providing labor market opportunities to these 
young people is also another medium- to long-run solution to--
these are what you are going to want to do dynamically. In the 
short run, you have the options of increasing incentives and 
incapacitation through incarceration, except I think that, 
relative to other developed countries, we already have 
excessive levels of incarceration for many offenses.
    The Chairman. Obviously this is a hearing of the Finance 
Committee on the tax code, but one thing that impressed me is 
8, 9, 10 years ago I saw a local news program about how a 
principal in a garden-variety school on the East Coast--it was 
mixed races, nothing really to distinguish it from any other 
school, except it had very high drop-out rates and very low 
test scores. They were in a world of hurt at this school.
    So the principal did something that took them 3 years to 
accomplish. It looked like a very good idea. Essentially, he 
figured out a way to have a parent or guardian of each student 
spend a couple of hours a week at that school. Maybe somebody 
was a playground monitor, maybe somebody knew a little bit 
about English or math, maybe somebody knew a little bit about 
shop or making something.
    But anyway, after 3 years he was able to get a parent or 
guardian of every single student to spend a couple of hours a 
week at that school. Grades shot up, drop-out rates plummeted. 
My sense is it is because the school and the parents took 
ownership of the school and what was going on, knew other 
kids--kind of a family, if you will.
    My sense is, the more schools do things like this, maybe 
earlier--I know it is easier at the mid-school age, but even at 
an earlier age, perhaps, you can address some of this needed 
sense of community at schools so kids have confidence, they 
know they have friends, they know somebody cares about them, 
and so forth.
    Dr. Newman. Mr. Chairman, I think one of the things we can 
actually justly be proud of in the United States over the last 
couple of decades is that crime rates have actually gone down 
very significantly in most of our cities.
    The Chairman. I have seen that. Right. That is right.
    Dr. Newman. That does not mean that that will necessarily 
last forever. I think the wave of foreclosures that is leading 
to abandoned properties in cities like the one where I live 
now, Baltimore, or cities like Detroit, may well create a turn-
around on that that we will not be happy to see.
    But I think that we need to recognize a very small number 
of people can make a neighborhood dangerous for everyone else 
who lives there. It is very rarely the case that you have 
massive numbers of people involved in gang activity. You have a 
few, and they make life pretty miserable for everyone else.
    But we do know that strong neighborhoods that have good, 
strong social backbones to them generally tend to police their 
own and become neighborhoods in which crime rates do not 
spread. So we need to look at what makes for stable 
neighborhoods, and all the institutions we have been talking 
about today--strong schools, strong families--contribute to 
neighborhoods that have strong social organization, and that is 
where you tend to see crime rates down, even if they are poor.
    So I think it is important for us to recognize all of these 
things are interconnected. All these institutions and their 
stability are interconnected, and you do not see crime spread 
where you have families that have opportunity for strength, 
schools that are functioning, opportunities for young people 
other than crime.
    Dr. Steuerle. Senator?
    The Chairman. Yes?
    Dr. Steuerle. Can I mention one tax provision I think that 
would affect the discussion here?
    The Chairman. Yes, good. We have to get to tax here.
    Dr. Steuerle. By the way, I reconfirm what you said. The 
example you gave is one--if we could figure out ways--and it 
would vary widely from a community in Montana to a community in 
New York--to have an adult presence around most kids most of 
the time, most of the year--there are a lot of different ways 
to think about that--it makes a huge difference in what happens 
in their life. This actually starts at a very early age.
    But the tax code provision I would refer to is wage 
subsidies. There is one group that is largely left out of our 
social welfare system. Our social welfare budget is largely 
oriented towards you and me as we get older. That is where all 
the money is going, we know that, on the entitlement side. But 
on the welfare side, it is for families with children, largely 
single parents with children. We tend to exclude the married 
families with children because their income starts rising just 
enough that they get excluded.
    The low-wage male, the young male and female who is just 
starting out in life, typically is excluded from this system, 
with the one exception: if they go to prison, they will get a 
lot of government money, but not necessarily to help them.
    I think there are ways to redesign our wage subsidies so we 
try to subsidize a little more, or reorient it so we subsidize 
a little more of the low-wage worker without requiring they be 
the one who raises the children, or they be the one who, on the 
side, helps raise the children as long as they do not marry.
    The Chairman. Thank you. My time has really expired some 
time ago.
    Senator Hatch, anything?
    Senator Hatch. Well, thank you. I just want to thank all of 
our witnesses for being here. I am sorry I missed part of this, 
because I was on the floor. But this is an extremely 
interesting area.
    I have some questions for you, Dr. Lefgren, but I think I 
will withhold them and submit them in writing so you can answer 
them for us, and for the rest of you as well. There are a 
number of questions that I would have liked to have had 
everybody on the panel give their answers to.
    But I appreciate you holding this hearing, Mr. Chairman. I 
think it is an important one, and I will do what I can to help.
    The Chairman. Thank you. Thank you, Senator.
    This really is critical. First, thank you. Second, I urge 
you to keep thinking. When you are walking out of here and you 
are going home, gee, here is something else that we could be 
doing, something else I want that committee to know about and 
push them on. So, please stay involved, because this is really 
critical.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 4:07 p.m., the hearing was concluded.]
                            A P P E N D I X

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